Teaching your child how to save money from an early age will set him on the path to success in the world … [+]
As parents, it is natural that we want to help our children save for their future and build financial literacy. Looking for ways to help them save money in ways that are not only tax efficient but will grow throughout life is a generous, strategic gift that gives a child life.
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But how to do it?
Roth IRAs, when open to minors, can be a great tool for achieving major wealth-building benefits. Basically, you are depositing money that will grow tax-free and be available for tax-free withdrawal when your child turns 59 ½. Of course, that is still a long time. Read also : Should you put our money into a Roth IRA or a traditional IRA?. When it comes to building wealth, time is really the best tool there is.
Can anyone do that?
Not everyone can qualify, but almost every child who has a job. To see also : The government owns a piece of your traditional 401(k) or IRA.
The money put into this account must be based on the income earned, so you cannot simply give the money to your child and put it in a Roth IRA. But if your child has a summer job mowing the lawn, babysitting, or packing groceries, that counts as earned income.
Let’s say they make $ 2,000 over the summer with this business. You can encourage them to put that money in the account or you can take any amount of your own money up to that $ 2,000 and put it in their account yourself.
Because of the income requirement, you probably can’t get away with opening these accounts for young children, but you can for a teenager.
How do I open an account?
Roth IRAs can be opened for minors, but they will need to be custody accounts which means they are in your name and not in your child. Read also : Protect Your Retirement Accounts From the Tax Man. To open it, you just need to go to any major brokerage house or financial institution and fulfill the request.
Opening this account is a great way to start teaching the importance of saving and the value of the dollar. In addition, it is a huge opportunity for donations, intergenerational wealth transfer and tax planning.
Lesson:
Teaching your child how to save money from an early age will set him on the path to success in the future.
The Roth IRA will give them a chance to increase their savings over perhaps 50 years in a way that is exempt from all future income taxes.
For smarter tax moves, I made my own e-book, Pay less tax now, available for free download at www.lowtaxbook.com.
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